Where should the payroll taxes be paid when contracting with a limited company abroad?

People regularly ask us this question, and the brief answer is that it depends. In this short article, we will set out the considerations that ensure that using a limited company or PSC abroad is trouble-free.

In a world without Double Tax Agreements (DTA), the company would pay payroll taxes in the work country, and the tax inspector back home would expect them as well, effectively taxing the same income twice. States enter into Double Tax Agreements to avoid this outcome and avoid an escape of tax. Most DTAs follow the OECD model, but let’s look at one example in what the French-British agreement has to say about employees (dependent workers) and directors’ fees:

Article 15 Income from employment

Subject to the provisions of Articles 16, 18, 19 and 20, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.
Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first mentioned State if: (a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days within any period of 12 months; and (b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and (c) the remuneration is not borne by a permanent establishment which the employer has in the other State.
Notwithstanding the preceding provisions of this Article, remuneration derived in respect of an employment exercised aboard a ship, aircraft or railway vehicle operated in international traffic may be taxed in the Contracting State of which the person operating the ship, aircraft or railway vehicle is a resident.
For the purposes of this Article the term “employment” includes in particular the exercise of management or executive functions, other than functions covered by Article 16, in a company subject to French corporation tax.

Article 16 Directors’ fees

Directors’ fees and other similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other State.

Regarding employment income, in short, payroll taxes are paid in the UK for a UK resident company if the stay is less than 183 days in a tax year. If the stay is longer than 182 days, then payroll taxes are payable in France from the start of the assignment.

Regarding the director’s fees, the taxes on them are paid where the duties are carried out. In other words, there is no 183-day period of grace.

However, both imply that the company paying the employee remains a resident of the home state and has not become a resident of the work state. Once the company has created a permanent establishment abroad, the position changes and employment taxes are due from Day 1 in the work country.

One can see that when you do not know that the work country tax authorities will not determine there is a permanent establishment or that the stay will not be less than 183 days, prudence demands that the company pay payroll taxes from the first day of the assignment. Since we do not recommend using a limited company to work abroad for less than six months, our advice and practice is generally to apply the payroll taxes in the work country unless there is a compelling reason not to do so.

So, what is a permanent establishment according to the French-British Double Tax Agreement? Let’s take a look:

Permanent Establishment

For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
The term “permanent establishment” includes especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; and (f) a mine, quarry or any other place of extraction of natural resources.
A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months.
Notwithstanding the preceding provisions of this Article, the term “permanent establishment” shall be deemed not to include: (a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character; (f) the maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs (a) to (e) of this paragraph, provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.
Notwithstanding the provisions of paragraphs 1 and 2, where a person – other than an agent of an independent status to whom paragraph 6 applies – is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State an authority to conclude contracts on behalf of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph.
An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business.
The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.

The clause to watch for most PSCs is this one:

2. The term “permanent establishment” includes especially: (a) a place of management;

If you are the sole director and shareholder of your company, then you are the management, and if you shift that to the work country, the company will create a permanent establishment. Not every tax authority will take this point, and of those who do, not all at the same time. Still, if they do and you have not paid the payroll taxes in the work country, you can expect a tax demand and possibly interest and penalties on taxes you have already paid unnecessarily back home.

So, let’s just summarise everything:

DTAs and Payroll Taxes

Without DTAs, Payroll taxes would be paid in both the work and home countries, resulting in double taxation.

DTAs: Most DTAs follow the OECD model, aiming to avoid double taxation.

French-British Agreement: Examines employee income and director’s fees.

Employee Income

Less than 183 days in a tax year: Payroll taxes are payable in the UK for a UK-resident company.

More than 183 days: Payroll taxes are payable in France from the start of the assignment.

Director’s Fees

Taxes are payable where the duties are performed, regardless of the 183 days.

Permanent Establishment

A permanent establishment is a fixed place of business through which a company conducts its activities.

Key indicators: Place of management, branch, office, factory, workshop, mine, quarry, or construction project lasting more than 12 months.

Exclusions: Certain activities, such as storage, display, delivery, or purchasing, do not constitute a permanent establishment.

Key Considerations

Company Residency: Ensure the company remains a resident of the home state and avoids creating a permanent establishment in the work state.

Stay Duration: Understand the 183-day rule for employee income and its implications.

Double Tax Treaty: Familiarise yourself with the specific provisions of the relevant DTA.

Local Tax Practices: Be aware of the practices of tax authorities in both countries.

Working abroad using your limited company requires a good understanding of the double tax treaty and social security treaty and experience with the local practices of the tax authorities in both states. Not having these can turn one of the best ways to work abroad into the worst. If in doubt, come to the experts at Access Financial.